India: HRC-CRC spread touches 2-year low. Will it sustain?

The hot rolled coil (HRC) and cold rolled coil (CRC) spread has dropped to more than two-year lows of around INR 5,000/tonne ($67). The last time it hovered in this range was in Jul’19. In fact, this trend had sustained for more than a year over Jul’19-Aug’20. Then began a volatile upward climb that peaked to a record INR 16,000/t ($214) in Jun’21, followed by a steady decline. October’s spread has dropped a sharp 69% from the peak and by 50% since Oct’20.

Interestingly, HRC prices have remained range-bound within INR 63,000-71,000/t ($842- 948) since April. On the other hand, CRC prices have lost almost INR 8,000/t ($107) since June to the present INR 75,700/t (1,011) levels, showing a much sharper downward movement compared to HRC.

Why has the spread narrowed again?

• Pent-up demand subsiding: The post-pandemic pent-up demand had peaked in the June-September quarter pushing up HRC-CRC prices. This scenario has normalised to an extent which is dragging down CRC prices.
• Exports push: The spread had peaked due to high export volumes across April-July, especially to Europe. At that juncture, industrial activity was higher than normal in Europe, fuelling imports of steel for the auto and white goods industries. However, now, after that frenzy, no bookings have been heard to the continent.
• Additional CR capacity from JSW: JSW Steel, a major flat steel player, is planning to increase capacity at its cold rolling mill (CRM) 1 from the present 0.85 mntpa to 1.80 mntpa. The pickling line and tandem cold mill (PLTCM) project has been completed in Q4FY’21. Moreover, one of the two continuous galvanising lines (CGL) of 0.45 mntpa was commissioned in Q1FY’22. That apart, commissioning of the second line is slated for Q3FY’22 at its Vijayanagar works. These moves have fuelled sentiments of increased CR supply which is acting as a dampener on prices.

Outlook

Mills are still bullish on prices because downstream demand looks optimistic.

The auto sector, the largest CRC consumer, may recover lost ground (from chip shortage) and grow 10% next year. The sector has reported better than estimated figures, despite the semiconductor shortage. Tata Motors’ total domestic sales are up 16% m-o-m and 31% y-o-y. Also, India’s largest auto maker, Maruti Suzuki India Limited’s domestic sales have increased by around 70% m-o-m to 112,788 units in Oct’21.

Real estate buying sentiment is expected to remain strong. As per JLL, sales of residential units in Q2’CY21 increased 83% y-o-y. Construction may grow almost 7% next year and consumer durables by nearly 14%, as per sources.

Domestic prices will remain supported since mills are not under pressure on account of adequate bookings made recently to South East Asia where post-lockdown demand is picking up, although November export volumes may not touch 2 mn t levels. Mills can thus afford to wait and watch how Europe pans out early next year when quotas re-open.

Mills would also weigh the opportunities China’s production cuts and exports defocus open up.

Considering the above factors, the HRC-CRC spread narrowing further from here looks unlikely since this is a business-as-usual level.